Service parts inventory definition
/What is Service Parts Inventory?
Service parts inventory includes those replacement parts and spares that a manufacturer or distributor keeps on hand, for sale to customers or for ongoing refurbishment activities. The seller keeps these items in stock to ensure that the products being supported will continue to function for an extended period of time, as well as to fix any items that failed prematurely.
How to Manage Service Parts Inventory
The managers of a company may keep large amounts of inventory on hand, on the theory that providing immediate fulfillment of orders will increase sales to customers. However, the downside of this approach is that the company's inventory holding costs will be extremely high, and will be accompanied by an increased risk of inventory obsolescence (since some items will never be sold).
Consider using the following tools to determine which level of investment in service parts would be most appropriate:
Profit per Customer
Only maintain high inventory levels for customers that are providing the company with significant amounts of profits. Lower inventory levels and the occasional backorder should be quite sufficient for all other customers.
Inventory Returns
If some customers tend to return parts on a regular basis, factor into the preceding profit calculation an estimation of the processing cost of these returns, and whether the returned parts had to be disposed of at a lower profit.
High-Need Items
It is quite possible that key customers are only interested in the immediate availability of a small number of parts, and are willing to accept a delay for other parts. If so, overstock the high-need items and de-emphasize the other parts. Learning about high-need items might require you to contact customers and inquire about their specific needs.
Related AccountingTools Course
These tools do not involve any measurement of the service parts inventory as a whole, because an accurate assessment of the inventory should be conducted at the individual unit level, not for the entire inventory. Instead, consider the following approach to evaluating the inventory:
Examine those service parts required by high-profit customers, to ensure that service levels are sufficient for these items.
For all remaining items, review the customer orders and complaint logs to see which items are required the most quickly, and assign them a high stocking priority.
Assign all other inventory items a low priority, which means that the amount of inventory required for these items should be relatively low.